Could a Paramount Sale Save Viacom?

Viacom’s search for a
minority investor in movie
studio Paramount could be
just the first move for the
troubled content giant.

Viacom — pressured by management succession issues, poor ratings, even poorer financial results and a general feeling that the pioneering kids and teen programmer has lost its mojo — finally blinked last week, telling analysts it will begin entertaining offers from outside parties for a minority stake in its Paramount Pictures movie studio.

While analysts see such a move as a good first step, some are calling for more drastic measures for the troubled content giant.

PLUMMETING PARAMOUNT

Paramount has surely seen better days. Revenue at the studio, once the home of iconic movies like The Godfather, declined 23% to $2.88 billion in fiscal 2015, while operating income plunged 46% to $111 million. While some of that was due to a tough comparison to last year, when the latest installment in the Transformers franchise, Transformers: Age of Extinction, was included in results, the declines have been going on for years.

Revenue was down 13% and operating income declined 12.4% in fiscal 2014; those numbers fell 11% and 28%, respectively, in fiscal 2013.

Tack on questions surrounding Viacom controlling shareholder and chairman emeritus Sumner Redstone’s health and the reported displeasure of his daughter Shari, Viacom’s vice chairman, with the selection of CEO Philippe Dauman as executive chairman, and that spells more difficult times for the programmer.

Possible Paramount bidders include online retailer Amazon, which has made a major push into original content, Chinese e-commerce giant Alibaba and conglomerate Dailan Wanda Group (which bought producer Legendary Entertainment earlier this year), with valuations ranging between $4 billion and $5.5 billion.

In announcing the deal, Dauman, who was paid a whopping $54.2 million in fiscal 2015 despite the company’s poor performance, said Viacom has fielded several offers for the studio and hopes to have a deal in hand by June.

While a minority interest sale could be a welcome cash infusion — it would help pay off looming debt maturities of nearly $800 million this year — Viacom’s problems are much deeper.

In a research note last week, Sanford Bernstein analyst Todd Juenger made the case for selling off the studio — before Viacom made its announcement — and other assets, leaving the company with just its core cable networks, which could then go private.

Juenger’s thesis is that Viacom, saddled with declining revenue, a plummeting stock price and questions surrounding the health of the 92-year-old Redstone and its succession plan, could sell off the studio, cable network BET and its international businesses for about $8.5 billion. By taking the remaining assets — MTV Networks, Nickelodeon and Comedy Central — private, Viacom would be free to make necessary cost cuts and reorganization moves without public scrutiny.

But that won’t be easy. Its stock was down 45% in 2015 and, until the Paramount announcement, was down almost 22% this year. The stock closed at $37.22 on Feb. 24, cutting the deficit so far this year to about 10%.

Juenger, who has dropped his 12-month price target on the stock to $30 per share, said Viacom’s declining prospects mean private-equity sponsors, who usually finance going-private deals, would probably only pay about 4 times cash flow for the remaining businesses, or about $12 billion to $14 billion. After paying off about $6 billion in debt, that leaves a private Viacom valued at about half of its current $14 billion in market capitalization.

“That’s a hard sell to public shareholders,” Juenger wrote. “We think the market is going to push the value of the shares there anyway.”

Even MoffettNathanson principal and senior research analyst Michael Nathanson, who had given Viacom the benefit of the doubt during its recent trials and tribulations, appears to be at the end of his rope.

DISH DEAL LOOMS LARGE

In a Feb. 9 client note Nathanson wrote, “Let’s be clear, all of our hoped-for catalysts are gone.” Any benefits from improved ratings were quashed by declining ad revenue, the lack of a carriage deal with Dish Network and reduced affiliate fee guidance to low mid-single digit percentage growth (from the high mid-singles) in 2016 and beyond, he added.

Getting the Dish deal done at a favorable rate will be a critical next step for Viacom, Nathanson wrote in addition to paying down debt and buying back stock to shrink its equity.

“All of this will take time against a more challenging backdrop,” Nathanson wrote. “At the same time, we wonder if we have heard the last from Shari Redstone, who can’t be too pleased with the continued drop in asset value. With that said, we are not sure what that displeasure is actually worth.”

Private Parts

Sanford Bernstein media analyst Todd Juenger believes Viacom should sell such assets as its international networks, Paramount movie studio and BET and take its core business private. Here’s what he thinks those assets are worth.